How will the Saudis play their oil hand now?
By Javier Blas
The Hamas attack on Israel that derailed Saudi Arabian Crown Prince Mohammed bin Salman’s principal diplomatic initiative — a three-way deal with the US and Israel — and scrambled the regional political landscape has left one thing unchanged: Riyadh’s influence over the global oil market.
For the last year, Saudi Arabia has cut production to boost prices, including a unilateral 10 per cent reduction in output on top of OPEC-negotiated curbs.
Although the market has relentlessly focused – wrongly — on perceived weakness in demand growth, the truth is Riyadh faced unexpected supply from countries under Western sanctions, notably Iran but also Venezuela and Russia. Since October 2022, Iran has boosted its production by as much as 700,000 barrels per day — the second-largest source of incremental oil supply this year, behind only US shale
The reason? Washington turned a blind eye to rising smuggling of Iranian crude, mostly finding its way into China via Malaysia. The priority was an informal détente with Tehran, including a prisoner swap and bringing oil prices lower. Moreover, rising Iranian oil exports were an unacknowledged cost of easing the pain of another set of oil sanctions on Russia.
Iran has long supported Hamas financially and militarily — although its role in Saturday’s brutal attacks remains unclear. Yet it’s difficult to see Washington maintaining its hands-off approach to Iran much longer. The Islamic Republic isn’t just supporting Hamas, but it’s also providing weapons to Russia for its war against Ukraine. And the key to that support is oil revenue.
The extra barrels from weak sanctions enforcement translated into a huge windfall for Tehran; the cash can be used without any restrictions. According to my calculations, Iran is making about $1.5 billion a month more at current oil prices than if its output remained capped at the October 2022 level.
Over a year, that’s about $18 billion and makes the current debate in Washington about the $6 billion of South Korean money transferred to a bank in Qatar for Iran to buy food and medicines look like a distraction.
Which brings us to Prince Mohammed and the opening created if, as I think, Washington is forced to clamp down on Iranian oil exports. Under such a scenario, Riyadh could achieve two policy objectives that today look irreconcilable: Boost production significantly and keep oil prices close to $100 a barrel.
For now, the market — thanks to smuggled Iranian and Russian barrels, plus strong production growth from the US shale, Brazil and elsewhere — doesn’t need extra Saudi oil. And it’s unlikely to need it for much of 2024, leaving the Saudis facing a second year of relatively low output. Add worries about a US recession, and the Saudis would probably keep pumping their current 9 million barrels a day for months to come.
The oil play, which would put the Saudi royal family again at the center of geopolitical power battles critical for America and Europe, is not a given: it requires America to face off Iran again, but in the run-up of presidential elections in 2024, the White House may hold off unless evidence of Iranian involvement in the Hamas attacks is strong.
The mistrust between Washington and Riyadh about Iranian oil sanctions runs deep. The Saudis, for example, believe that Donald Trump played them in 2018 when the White House convinced them to hike production ahead of the sanctions, only for Trump to weaken them at the last minute. My expectation is the Saudis would first want to see proof that the US is clamping down on Iranian shipments before they boost production, rather than the other way around.
For Riyadh, that only makes sense. But President Joe Biden would be, literally, over a Saudi barrel.
For Prince Mohammed, it’s a long way from the position he was in before Vladimir Putin invaded Ukraine in 2022, when he was a virtual pariah in the wake of the murder of journalist Jamal Khashoggi.
In the aftermath of Russia’s attack, the prince, coming in from the cold, was able to exploit global leaders’ worries about rising oil prices and surging inflation. He enjoyed a string of state visits, including a presidential fist-bump from Biden, who in 2019 promised to make him a “pariah,” and a summit with Chinese leader Xi Jinping.
The surge in energy prices created a windfall for Riyadh. While the rest of the world struggled, the Saudi economy expanded by 8.7 per cent in 2022, the fastest among the G-20.
It wasn’t an easy ride: The Saudis had to balance their oil alliance with Putin with the pressure from Washington to cut ties. What emerged was a “Saudi First” energy, economic and foreign-policy agenda, which puts the kingdom’s interest above everything.
Oil prices are for now little changed — up just 4 per cent since Hamas’s attack that has killed 1,800 on both sides — indicating the energy market is hedging its bets about whether the conflict would engulf Iran. Still, the economic realities of Hamas’s atrocities mean Prince Mohammed can both reinforce his diplomatic sway and boost Saudi coffers. But it does come with serious challenges.
The talks with the US and Israel, while normalizing relations with the Jewish state, would have yielded security guarantees from Washington and access to US civilian nuclear technology. It could be “the biggest historical deal since the end of the Cold War,” he told Fox News last month. And the opportunity for Riyadh to increase production at the expense of Iran requires Biden’s participation.
So even with the diplomatic setback — and the backlash that’s sure to come from Saudi sympathies with the Palestinians — events have dealt Prince Mohammed’s oil economy its second winning hand in 18 months. On the first occasion, he grabbed the opportunity; and he’s likely to do the same again.